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Monday, May 7, 2012

The market is entering dangerous waters, and there are several indices now at critical support levels. It appears likely that the market is in the early stages of an intermediate trend change.

It's been challenging lately, with the market looking bearish one day and bullish the next, but such is the nature of trading ranges. As I've said before, until it breaks one way or another, it's not necessarily advisable to get too attached to a position. I suspect a trend change is starting, but I'm not yet married to that view, until it confirms. It also bears mention that this type of market, which is "headed to the moon!" one day and "crashing to the ground" the next, is characteristic of a top.

The bearish trade trigger of 21 points (a break of 1394 targeted 1373) mentioned on Thursday, was easily captured on Friday. This is as painless as trade triggers get, since this trade took virtually zero drawdown. There are more trade triggers setting up now across several markets. Before we get too into the short-term, I want to examine a few long-term charts in detail.

The charts pretty much tell the story. First up is a very long-term chart of the New York Composite (NYA). NYA is holding just above what has been an important pivot many times in the past. The chart isn't log scale, but the log chart reveals the same key pivot.

The S&P 500 (SPX) also tells a similar story, and is now sitting right on the median channel line of the uptrend off the March '09 lows (black dotted line). It's also sitting on the parallel channel line of the '03 and '09 lows -- which "just happens" to match the trendline connecting the 2000 and 2011 highs (red line). Both the black channel median line and the aforementioned red trendline are important to the bull case.

The Russell 2000 (RUT) is another market holding just above important support, and has now developed a potential head and shoulders top, just as I speculated it would a month ago.

A study of the RUT weekly candlestick chart may also be revealing.

INDU also sitting on trendchannel support.

Conversely, the dollar looks ready to rally. This chart has played to perfection since I first published it. It's important to note that the red b-d trendline (okay, fine -- the trendline is blue, the "b" and "d" are red) needs to be broken for first confirmation. The blue wave-a high needs to be broken for final confirmation.

Oil continues to look bearish, as mentioned on April 4. The next target for oil is 91-92.

The bearish SPX count is looking decidedly more probable.﻿ It's important to remember that 1357 needs to be broken to confirm. The chart below shows the next bearish trade trigger, which could be considered to have triggered on Friday, however, the "safer" trigger is shown in the chart beneath this one.

Here's another way to view the bearish trade trigger. There's a bullish trigger shown too, but is seems so very far away now. However, nothing's impossible in a range-bound market. Just as the market showed little support when it fell back into the range (as I warned), there is also little resistance in that range, and the market could race through it again. I'm sure all it would take is a wink and a nod from dear old Mr. Bernanke (aka - The Beard).

My best guess at the short-term wave count for SPX is shown below. The odds do favor a larger bounce developing soon, but, as is the nature of odds, they don't guarantee it.

And finally, the short-term view of the INDU. This chart shows a potential head and shoulders in development, to go along with the SPX and RUT. The alternate count shown here is still technically possible, but seems lower probability. It is shown largely because the impulse wave lower has not quite confirmed yet.

In conclusion, the market is very close to confirming an intermediate trend change, but has not quite done so. The preponderance of evidence seems to suggest that it will confirm soon enough. Of course, we've seen this movie before. The good news is that there's plenty of key support levels which have entered the picture, and which should keep us pointed in the right direction. Trade safe.

Thanks Katzo, I take it you use the 60 min W%R as a general litmus test before you go short, avoiding both flat and rising.

I think it would be safe to say that there is little method to my madness right now as I am searching for a method. The only things I know I am doing right is that 1. I am always putting a stop in (~2.25 ES) for every position and 2. I am staying with a single ES contract.I'm certainly not doing well, but I'm not breaking the bank either, overall in ES I've been flat or a little down which I'm chalking up to education.As for charts, I haven't been marking them up so there isn't really anything to post. Timeframe wise, 3, 5, and 15 minutes charts with Full stochastics, RSI(14,70,30), and MACD(12,26,9,EMA) frankly I am getting a bit of information overload and having a hard time seeing the forest through the trees.

I know you have more than enough to do with your own trading and don't need to be taking time out to school me, but I do greatly appreciate the time you are taking. If there is a book/website you'd recommend reading to build up a basis of a method I'll certainly read it. already have read F&P once through, and have started on "The disciplined trader" by Mark Douglas.

Just to explain my process or analysis, I use EWs first and foremost. Then I use MACD, stochs, W%R, and GET [strength] Oscillators. I use GANN, regression trend channels, Andrews Pitchfork, fibs and fib circles, and a 20/50 MA for a check & balance. I use candle recognition but 'the' indicator candle might occur on a time frame I am not watching Other than EWs, no one indicator will work all of the time; I have to switch both time frames and reliance on the importance of an indicator depending where we are in the run. I wish it was that simple where all you had to follow was a W%R and an EW; it is not.

If a good EW3 is established I define the tgt and switch to a longer time frame to avoid the noise. When we are near the tgt I switch back to lower time frame to discern a point of transition. It is like shifting gears in a sports car. As the mrkt switches in ST & IT moves, the analysis has to switch too.

Don't worry PL...I'm st-t-t-ress-s-ed...Kidding of course. Most excellent work of today's article...really clear where we are (on the knife's edge). Thanks for doing such a great job putting together useful info in an easy to read and understand format...Not enough sarcasm today though. Us Philly boys always appreciate sarcasm :)

congrats to those who bought /ES in the low 1340's while bears everywhere were hyperventilating last night -- It is EARLY in the bear game - waves need to build - we can't even guarantee some indices might not go to new highs at this point

thanks all the info K7 and PL.. i'm studying the different gaps and i'm more confused than ever :) Is a gap fill just the keys for it to turn cleanly or will a gap fill continue in direction to finish the EW count. Trend direction, EW, time frames are stalling my brain as im waiting for the dang pot of coffee to finish brewing! lol

IMO gaps always fill. If they fill immediately the mrkt usually reverses that direction. But have seen them keep on going in same direction. We are at the opening; openings tend to be bullish for at least the first 1/2 hour in a bear move Potentially they could draw in some bulls. All depends on if more ppl are buying or selling to set the ST direction. I thnk still down.

agree w/ the gap thesis. the fact we had gaps near the highs on spx still out there was ONE of the reasons I wasn't very near term bearish until they filled. filling this ES gap this morning is good for the bears, but counter intuitive to most bears who saw the move overnight here in US and were undoubtedly salivating.

Said IMO gaps always fill. If they fill immediately the mrkt usually reverses that direction. But have seen them keep on going in same direction. We are at the opening; openings tend to be bullish for at least the first 1/2 hour in a bear move. Potentially they could draw in some bulls. All depends on if more ppl are buying or selling to set the ST direction. I think still down [by EOD but might reevaluate as nothing is clear].

I agree, but it does seem curious to me after a 50 point drop in a week, near major support, and little volume. Looks like most of the volume happened friday at these levels. One could argue we've run out of buyers for this dip... (at least until the momentum traders jump in) if so, what's the bears excuse?

thanks Katzo, you're a huge help in navigating these troubled waters... It seems I picked a very hard to time start trading, where things don't make a whole lot of sense and whipsaws are a daily occurrence... As I see it, if you can survive this environment "normal" markets should be relatively easy! :)

Well, hello world! I just took a good look at PL's first chart with the scene of the crime and the pot at the end of that NYA bubble rainbow. What an address, from 77th St. down to 27th St.! Kind of like going down 10 floors into the vault at a certain bank. Deeeeeep underground. At least we know, theoretically, how to make money on it. That, in my opinion, is why God invented tobogganing.

Fair warning to anyone holding shorts in SPX (et al). I just saw a chance to unload some SSO that I foolishly bought last week at breakeven + commissions so I took it. That likely means it will go straight to the moon.

Futures seem out of touch with reality right now. Or is it the cash market that's out of touch? In the Russell, futures are up by double what the cash market is. And in the S&P the futures are up about 170% of the amount that the cash is up. No doubt a lot of the disparity is due to the fact that the futures market and the cash market don't close at the same time, but still this is quite a glaring difference. What a wonderful tool for manipulators that is, that those two markets use slightly different times of day from which to start their measurements.

Haven't done anything today been watching RUT and it is looking more and more like the ABCD, weak E scenario is playing out. So the question for me to get answered is whether or not a EW 1 to 2 can have an ABCD expanding triangle that will end with E making its own contracting triangle...... And I left my book at home this morning, Daddy's lil helper was helping a lot today.....

I have been watching that divergence all day. Seems like the futures market is keeping the cash afloat. I don't track this like I should so I don't fully understand the implications. Maybe you could help me there AR. Thanks again.

DRG did another BCS 815/820 for expiration this week at a 50 cent credit. Still unfilled I think but I think we see a turn here late today. This was a similar trade I put on last week. Best of trades to you. This is far from trading advice as well. Just my opinion. I always value your input.

My apologies TRB but I don't follow it very closely either. I had just opened a page showing the futures out of curiosity and noticed the big divergence. I don't know what it means to be honest. I don't know if futures traders are actually expecting higher prices from the cash market or if the cash market just doesn't care what the futures are saying and have decided to head lower anyway. One way or another that disparity should tighten up somewhat.

Same here. I'd made up my mind that I was going to hold my positions no matter what the markets did this morning so I was happy to ignore the alarm and catch up on a bit of badly needed sleep. 4 hrs. a night is about all I need to function pretty well but a re-charge feels pretty good once in a while too.

A market breaking down wouldn't have let you out breakeven... i don't think i've noticed a single proposed long trade on this board in 48 hours. When everyone is on the same side of the market...........

One thing that has me wondering is the strength in the $TRAN today AR. I has been stubborn and stuck in a range. For a while it looked fairly weak but has not followed thru. Do you have any observations on this? Thanks again for your time.

I don't have the nerve to offer my longs. I pick and choose them on a short term basis (2 weeks tops) in order to A) pick up their cap gain heading into the ex-div date, or B) pick up the div if plan B doesn't work. Boring, unimaginative, no EWT involved, but it maintains a steady cash flow in months like this one (crowded with lots of div choices).

Said these are my thoughts, if we really are commencing with a bear mrkt we should screw around for most of the day, then sell off at EODthis seems to be the mode, right after notable down days draw in the bulls and hang them out to dry with a good sell off EOD.

Spot on!! High Five! By the way, do you think it is better to buy before or after earnings for CEL? Just to let you know I bought some ERF at 17.48 today, of course it then went on to drop to 17.28 haha again my WWWCI kicks in. Interesting is that it actually closed above my bought price. Was that a wave 5 on ERF? now it's time to rumble??

Lots of ABCs today, day after big down move is mrkt thinking, resting, indecisive. Tomorrow we head down again. Here is something about VST timing, see how it worked out? Gotta know the dynamics of various days, this was a day I am very familiar with. BTW I never trade off of a 1 minute chart, this is just for illustration purposes.

A lot of references to head & shoulders patterns today. As far as I know, Edwards & McGee were the first to identify this set-up (in their seminal work "Technical Analysis of Stock Trends"). However, in addition to price forming the requisite pattern, they indicate that volume is key to identifying a true head and shoulders pattern. Specifically:1) Volume should be very heavy as the peak of left shoulder (LS) is sketched out, and should decline as price recedes from the high of the LS, 2) The head should be forged on another high volume advance, but volume should again recede into the correction off the top of the head,3) The right shoulder should be accompanied by lighter volume than was evident as the LS or the head was taking shape

Given these requirements, which the authors deem "essential" to the identification of a "true head and shoulders pattern", it seems to me that labeling the long-term developments in the NYSE Composite as a head and shoulders pattern is a stretch (as volume did not contract following the peaks of the LS and head). Probably a bit tougher to assess volume swings in shorter-term/intra-day charts, so I am not (necessarily) taking exception to the labeling of the lower degree patterns, however, I am very curious about why you are diagnosing the long-term NYA pattern as such.

AMZN may be set to move up, tgt 237, may move against mrktCMG ready to fall moreAZO less clear than CMG but may be set up for next fallGS less clear but headed for 80 to 90 eventually, with mrktV & MA damagedTICC I mentioned up 2.35%

Seems reasonable to me...a first wave leading diagonal with an ending diagonal in the wave 5 (of 1) position (a triangle can only occur at waves 1 or 5--or C, but not 2)...PL & Katzo might provide a more definitive answer though.

I saw that you were asking about TSI last night. With all due caveats regarding the sheer foolhardiness of taking any sort of trading advice from a rank newb such as myself, I'm happy to share what I've learned. I guess I know like 4 or 5 ways to use it.

True Strength Index (TSI) was originally conceived by William Blau as a momentum indicator, so one way to use it is to simply buy when it turns up, sell when it flattens out turns down (and vice versa). I've mostly found that to be a great way to get whipsawed. But I ran across a suggestion on another blog to draw trend lines on the TSI graph and exit or reverse on trend line breaks, and this appears to be a pretty workable enhancement to the purist approach. No idea whether the credit for that goes to TSI Trader or Blau.

Blau also added a zero line and a 7- to 9-period EMA to TSI and dubbed it an "Ergodic Oscillator". In this configuration I believe the idea is that you can make an aggressive entry on a TSI-signal line crossover or a more conservative entry on a TSI-zero line crossing and then exit upon crossing the signal line in the opposite direction -- basically the same trading rules as for MACD. This seems to work pretty well.

Like MACD, TSI is an unbounded oscillator and the two look quite similar when they're tuned similarly and directional divergence on a TSI graph versus the trend in the price line can give you advance warning of possible trend changes. The principle advantages I see for TSI are that it responds a little more quickly on the turns and that it tends to distribute itself more uniformly above and below the zero line. The latter makes it more usable as an Overbought/Oversold indicator.

I don't know if Mr. Blau would concur but TSI values above 25 or below -25 are popularly considered to be overbought or oversold respectively. In this role it seems to give you pretty much the same signals as a similarly tuned Stochastic oscillator, which would have to be my next favorite oscillator so far.

Attached are some annotated screen shots. On my charts, the heavier purple line is the primary TSI, the thinner magenta line is an EMA signal line for the purple line. The Blue line is a second TSI tuned to a longer time frame which I use as a confirming signal and/or a trend indicator (stole the idea from some youTube videos I ran across).

A lot of H&S patterns are not the real deal as described by E&M. You have been very perspicacious William in noticing the data you describe. They also require that the preceding advance should be extensive, so for example the month advance in the Dow doesn't meet that requirement even though it looks s great H&S. It isn't. By their definition. Some even see H&S on minute or hourly charts which is odd to say the least. When these fail as they inevitably do they are called, what else- 'failed head and shoulders'. But actually they were never H&S to start with. I agree with you :)

Not really. As you said, it's stuck in a range. Looks like it's forming a symmetrical triangle which really could break either way. And when that happens, the moving averages and momentum indicators all more or less just go flat too. So there's no guidance from the trannies that I can see.

Thanks...one more. ERB?? Also...you ever have trouble typing and editing comments here? I don't know if it's because of my iPad, but disqus freezes me out a lot. I tried to as the ERB question along with VST...but it froze me out.

I kinda wish I had the foresight that you do. I'm taking a real beating with my AAPL share. Bought it at $638 so at least I'm not one of those fools who "bought at the top". The top was at $644. But I thought the idea was to ride it to $1000. That's what Jim Cramer said to do. So far I'm down almost 15%. When I throw in the commissions I'm down about 30% so I should probably start looking for a broker with better rates too :-)

yeah, Disgust froze up around 11 to 11:30 am. It does that. No trouble typing or editing tho.ERB is a nickname someone (was it DirtRockGuy?) gave me, means Emotionless Robot Bastard, because my mainframe does not need to sleep, it just charts 24/7.

Hi CalD. thanks for sharing. For some reason I don't see much difference between TSI & MACD as you do. you mentioned TSI being more responsive- assume you make the comparison based on the same parameters right? and what are your preferred parameters (for long/short period)? TIA

I shorted AMZN on the breakdown of the continuation pennent, long the 230 put at 231, covered today at 223 and went long the 230 call, my upside is a little more conservative than Katzo's at 235 due to OPEX influences. The breakdown was IMO an ABC 3 to 4 move leaving a five up to come. At which point it would be ideal to place a long put trade at 220 looking for say 209 and a gap fill. I intend to use the June contract for such a trade should it materialize. But like the man said it was the chart that told me to do it.......

Thanks Cal, for taking the time. My TSI doesn't seem to have these settings. It has a default setting of 3/9, but only shows one line in the indicator panel. So I've been looking at it as I might an RSI 14 or similar. Given the settings I have to work with, I'm not sure it has any additional value over MACD, etc.. That's what made me curious if I might be missing something.

I think the ERB label was handed out by Dust Devil or Rocky Top....... There is an alternative to the ERB which is the usual state of being for Sir Katzo... That would H ERB stands for Heartless Emotionless Robot Bastard, usually quoted by those who took the other side of the trade against the ERB..... generally because he refuses to give the money back even to his friends.....LOL

An important note about sell triggers: they operate on an active/suspended type basis. In other words, the trigger is considered "active" when the market is below the line, and "suspended" when it's above it. Personally, I like to see a few bars print beneath (or above) the trigger before getting too excited about it. If I take the trade and it whipsaws immediately, I'm quick to close and I'll sometimes set a sell stop beneath the low of the whipsaw, depending on how it looks. In this particular instance, I got short and closed immediately, as mentioned in real time.

It's also important to realize that, technically, the way these types of triggers work is that they operate *against* a certain print high. In other words, the trigger is only invalidated (in this case) by the market printing new highs above 1415.

I am not married to the head and shoulders interpretation on NYA, which is why it's got a "?". The volume noted is actually in reference to (and support of) the triangle (in red), as the declining volume *does* fit the triangle pattern. I realize now that I deleted the old annotation which described this, so I understand your question. Originally (the first time I published this chart), I was pointing out the triangle -- and noted the potential head and shoulders more in academic curiousity.

I've found that the h/s patterns often work on even 1-minute time frames. It becomes a bit of a self-fulfilling prophecy for the market these days. The traders and algo's use these patterns, so regardless of how E&M originally intended them to be used, I believe the playing field has changed since they first wrote da book. :)

NP, NJ. I was hoping you were around since I didn't get a chance to reply to your question the other day. The relative responsiveness of TSI and MACD is not-hit-you-in-the-face different though. On average I'd guess you get your signals maybe one bar earlier with TSI, maybe not quite. One bar can be a pretty big difference sometimes though.

But it's a little hard to make a direct apples-to-apples comparison since the number mean different things. With MACD the moving averages are used directly by the base formula -- formula being kind of a grandiose term in this case since it's just a simple subtraction. With TSI, the MA's are just used for smoothing the index as a post-process.

If you set both MA's for MACD to 1 you get a flat line at 0. If you do that with TSI you still get a signal -- it's a scary looking signal but it's a signal (I mean a signal in the textbook sense, not a trade trigger). So TSI is more tweakable and you can season to taste, but that also means any comparison between the two is going to be subject to some amount of subjectivity. Typical default settings for TSI are 20 for the first smoothing, 5 for the second and 5 for the signal line.

FWIW though, here's a chart comparing a standard 26,12,9 MACD to a 26,7,9 TSI. The curves look almost identical but you may note that most of the trigger line crossovers happen about a bar later on the MACD chart. Also note the slight suggestion of possible bullish diversion on the MACD on the two lobes straddling 15:44 that TSI gets right. And TSI is completely usable with primary averages down to like 6 or 7 if you want to trade faster response for a little more jagginess, have a party.

Anyway, that's why I keep referring to TSI as a better MACD. The difference between them is like the difference between a gasoline and electric powered car. Under the hood they're wildly different but from the driver's seat, if you know how to drive one, you pretty much know how to drive the other.

Playing off the seasonal decline in crude and distillate prices. Check your crude and gasoline futures charts on a continuation basis since about 1999 there is a tendency to sell off at the end of the April May contract and climb into the July contract. See the chart I posted a couple of months ago you can see the improvment in my wave counting from then to now

I am gonna wait and position trade the long put trade. I would be a little leery of "The Beard" and QE jawboning this week with all the posturing out of Europe. All it would take in this market would be a "You know the FED is always ready to step in.....if necessary to promote stability" comment and off the races we go for at least a couple hours, long enough to run a lot of stops and freak out BCS holders at exactly the strikes you mentioned. Also, I do not know where a possible E wave would terminate. See my chart for why I really think an E is in the works. The confluence of all the prior swing points have gathered at a particular area of the chart. that means something should happen there that is significant.

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